Buy-back buoys Eu750m UniCredit Tier 2 return

UniCredit on 26 May sold its first Tier 2 issue since October 2013, a Eu750m 10.5 year non-call 5.5 transaction, after buying back Eu414m equivalent of old-style Tier 1 and Lower Tier 2 euro and sterling bonds. Here, Waleed El-Amir, head of group finance at UniCredit, discusses its return to Tier 2 and wider capital issues.

Why did you come to the market at this time?

There were a number of reasons. Firstly, we had concentrated issuance of Tier 2 on the retail market in the last couple of years to satisfy the significant customer demand we were seeing. It thus felt important to diversify and tap the institutional market, given our long absence and to prove our ability to successfully do deals in that market. Secondly, we had seen a significant rally in our bonds on the back of the buy-back we announced previously. They tightened quite significantly, roughly 65bp, before we came with the Tier 2.

It was a classic liability management exercise. We ran the capital buy-back, buying back bonds from investors that potentially wanted to sell, created new space for new issuance, helped our secondary curve tighten, and then on the back of that, and a pretty positive backdrop, we effectively issued a Eu750m deal that was two times oversubscribed.

We moved very quickly — we closed the buy-back on the Tuesday and issued on the Thursday of the same week.

Was the size of the Tier 2 set from the start?

We said Eu500m-plus. We could have potentially done a Eu1bn deal, as we had a Eu1.5bn book, and if the book had been over Eu2bn we may have considered this. But most of the deals that have come recently, including the recent Deutsche Tier 2, have all been around Eu750m. So we decided we’d rather have a deal that’s slightly smaller to try and have it trade well in the secondary market, rather than stretch the book out to allocate Eu1bn.

You mentioned attractive backdrop — are you thinking more of the general market conditions in the capital space, or related to Italian banks and UniCredit?

It’s a combination of both. You need the market to be in decent shape, and more importantly you need people to have a positive stance on your credit.

Having a 60bp rally in your credit in the week leading up to issuance is a pretty compelling sign that people are going long your credit — mainly because of the buyback, but also potentially a positive momentum around the credit story.

It was an interesting choice of day, because we decided to come the day of Corpus Christi, with Germany and Austria shut, so part of the investor base was unavailable. The decision we took was that if we didn’t come on the Thursday, effectively Friday was going to be very difficult because there was a Monday bank holiday in the UK and the Germans off on the Friday as well as Thursday, with a lot of people taking long weekends — so even fewer people were going to be at their desks. And Friday is never a great day to do a deal. So effectively that pushed you to Tuesday, but we knew beforehand competing supply was imminent, and Generali did in fact come on Tuesday at roughly the same spread as us, plus another three Tier 2 deals. So the choice was: do you go on Thursday knowing that you don’t have the German investor base, or go on Tuesday knowing you probably go head-to-head with a very similar credit with a similar spread and with a lot of supply coming.

I think we made the right choice. We avoided having a head-to-head with Generali, we avoided having to deal with competing supply, and it may have cost us Eu200m or so in orders but the book was well over what we needed to get a nice trade done.

To what extent did the buyback play into that?

The buy-back kind of fulfilled the desire of certain clients to get out, and actually not a lot of clients sold. We were looking to buy Eu700m, and only around Eu400m was tendered.

You can read that in two ways. You can say, well, that wasn’t too great… But it’s also actually a pretty positive reflection on the credit. People have seen a sell-off in the credit and asked for a liquidity event, but interestingly when you say, OK, put your money where your mouth is and sell me the paper, they’re still saying no – some people are not willing to part with their paper even for a three point premium. So on the basis of that, and the rally we had because of the buyback, and some people actually asking for more paper, we went ahead with the Tier 2. So there’s always a bit of a silver lining.

You mentioned you’d done retail Tier 2 — will that be more difficult going forward?

At the moment, given some of the political noise around this, yes, I think that’s going to be more difficult. I think it’s important to underline that Consob has not banned the sale of retail Tier 2. But I think given the political climate, it is harder to place Tier 2 in the retail network today, yes.

Looking at the credit side, there’s been these moves with the Atlante fund. Is that a credit positive, and is it playing into people being attracted to Italian credits again?

Yes, I think it’s definitely credit positive. It’s fulfilling two roles, right: making sure that recaps of banks like Vicenza — and we’re waiting to see what the result is going to be on Veneto Banca — effectively have a backstop for their equity capital raisings; and secondly, also as an additional tool to help Italian banks divest of their NPL stock.

There’s no magic wand. I think the market’s expectation on NPLs is perhaps not realistic. A stock of anywhere between Eu170bn and Eu300bn, depending on how you classify it, is not going to disappear overnight, but Italy is making good progress in addressing this important issue over a reasonable timeframe.